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Stocks rebounded on Friday following better-than-expected earnings by AIG (NYSE:AIG) and Hewlett-Packard (NYSE:HPQ). HPQ not only topped expectations, but also issued optimistic guidance for the second quarter.

European stocks rose on an increase in business confidence in Germany. The Stoxx Europe 600 gained 1.3%, recovering much of Thursday’s losses and closing higher by 0.4% for the week.

At Friday’s close, the Dow Jones Industrial Average was higher by 120 points at 14,001, the S&P 500 gained 13 points at 1,516, and the Nasdaq gained 30 points at 3,162. The NYSE traded 682 million shares and the Nasdaq crossed 372 million. Advancers led decliners on the Big Board by 3-to-1 and by 2.6-to-1 on the Nasdaq.

For the week, the Dow rose 0.1%, the S&P 500 fell 0.3% (breaking a seven-week winning streak), and the Nasdaq lost 0.9%.

Today, we will review just one chart, the S&P 500, since it is not only the most widely followed broad-based index, but has some unusual and interesting technical features. First, the overall long-term trend is up; however, the short-term trend is down but holding after Friday’s recovery rally.

The S&P 500 closed on its first line of resistance at 1,515, and Thursday’s low at 1,497 is the current immediate support line. Thus, the index is trading in a near-term sideways pattern between the two lines. The next support, and most important, is its former breakout line at 1,475, and the 50-day moving average at 1,476.

Note that the Relative Strength Index (RSI) is in a “non-confirmed” status, since when the index’s price made a new high four days ago, RSI failed to follow. This is interpreted as a negative.

By magnifying the last month of the S&P 500’s chart, we see that on Wednesday, the index missed triggering a “key reversal day” (KRD) by only a hundredth of a point. Instead, it exactly matched Tuesday’s high at 1,530.94. Even though it missed triggering a KRD, the price action is negative. (For a discussion of the KRD, see Thursday’s Daily Market Outlook.)

Unless the S&P 500 can break above 1,515 and mount a successful attack on the high, then we should assume that the market will test the next support area at 1,497, and after that the stronger support at 1,475, which is bolstered by the 50-day moving average.

Traders should sell or short sell rallies, and investors should wait patiently for a more meaningful correction before taking new positions.

It is likely that Friday’s rally was merely a reaction to the attempt by the Fed to put a better spin on the economy. Was anyone surprised to see the traditional spokesman for the Fed, St. Louis President James Bullard, appear as guest host on CNBC’s early morning show “Squawk Box”? Was his interpretation of the notes of the February FOMC meeting as “no real change in the easy money policy” the catalyst for the triple-digit rally? I’ll leave it to our readers to answer that question.